The Pension Protection Act of 2006 established Qualified Default Investment Alternatives (QDIAs) as safe harbors for investing non-allocated defined-contribution assets. The Department of Labor's guidelines for QDIAs advance three investment options: target date funds, balanced funds, and managed accounts.
In the present context, “managed accounts” mean that a service provider tailors diversified portfolios of the plan's investment options on behalf of individual participants. Managed accounts hold the most promise for advisors, but they require adherence to an audited prudent investment process—a process that could take years to achieve scale.
General target date funds (TDFs) are a set-it-and-forget-it, one-size-fits-all approach; they begin aggressively, when the target date is distant, and then reduce risk through time. TDFs are the most popular choice of QDIAs now. However, TDFs have historically been executed poorly because they have been designed to serve beneficiaries beyond the target date—that is, to death. Such funds have become known as “through” funds as contrasted to “to” funds, which are designed to end at the target date. A secondary issue with “to” funds is the amount of equities held at the target date. Individuals face a “risk zone” in investing for retirement, which comprises the five to ten years leading up to and immediately following retirement, or other target event when, savings are at their highest level and the ability to recover from loss is at its lowest. TDFs typically comprise thirty to seventy percent equities during this time, putting the investor at substantial risk if there is a loss. Thus, what is needed is a method of managing a target date fund which ends at the target date in entirely safe assets, while maximizing return during the lifetime of the fund.